Hathway Cable & Datacom IPO Review

Investors can avoid the initial public offering of Hathway Cable & Datacom, a cable distribution and broadband services provider, given the inherent challenges in driving realisations in both the segments that it operates in and the severe competition from well-entrenched players with alternative delivery platforms.

At Rs 265 (upper-end of price band), the stock trades at an EV/sales (enterprise value to sales) multiple of 5.7 times based on its FY09 numbers on a pre-offer equity base and a EV/subscriber of Rs 3,842.

The cable industry may face several scalability hurdles, what with the limited growth in television households, the pace conversion of analogue networks to digital ones and within that conversion of free-to-air viewers to pay-channel mode, all being subject to uncertainty.

Hathway has been in operations for over a decade now and has grown over the years, especially in the last two-three years largely by taking the inorganic route to expansion. Acquiring MSOs (multi-system operators) and LCOs (local cable operators) has enabled the company to grow at a fair pace in terms of revenues. With a negative return on networth and spiralling interest costs (only a small portion of debt is to be repaid from the offer), an acquisition spree, though the only way to grow in this business, may not help strengthen financials.

Cable business challenges

Between FY-06 and FY-09, the company grew its revenues at a compounded annual rate of 38.5 per cent to Rs 673.2 crore. Despite having a reach that is much higher than most other cable operators (estimated base of 8.2 million cable homes) Hathway lagged behind Den Networks in terms of revenues. This suggests that ARPUs (average revenues per user) are quite low for the company, a fact reinforced by its stated figure of Rs 55.8 per month.

Of its total subscribers, only a million of them are on digital cable, which is the key reason for these low ARPUs.

There are several inherent problems in the cable distribution business, which affects all companies in this business. One, there is always the menace of local cable operators understating revenues, which cripples financials for a player such as Hathway, till such time as most analogue connections are upgraded to digital ones, which could be time-consuming.

Second, even if large-scale digitisation of its cable network is achieved, the company still faces the challenge of getting its viewers to subscribe to pay channels, which is the key revenue driver. This is because a viewer has the option of not taking a set-top box and viewing only free-to-air channels. Regulatory controls on pricing also pose a threat with the regulator in fact mandating a Rs 77 package with 30 free-to-air channels. Third, the growth of the industry itself may not be that encouraging. A recent report from PricewaterhouseCoopers indicates that the number of TV households would grow at just 2.7 per cent annually over 2009-13 to 135 million. Further, the report states that the number of cable households would grow from 71 million in 2008 at just 2.4 per cent annually from 2009 to 80 million by 2013.

A FICCI-KPMG report predicts a higher 5.7 per cent annual growth rate.

Sure, the telecom regulator has mandated conditional access in 55 cities by 2011. But, experience suggests that the adoption of conditional access even in the metros has been slow, with most of the households content with free-to-air channels. A TRAI report gives out the fact that only a little over eight lakh set-top boxes have been installed in the four metros put together as of June 2009.

There may, therefore, be limited success in large-scale digitising of cables and driving revenues as a whole. Then there is competition from alternate platforms such as DTH (direct-to-home). Within just three years of its launch, this platform now boasts of as many as 18 million subscribers, thanks to large well-entrenched players such as Dish TV, Tata Sky, Airtel Digital TV, Big TV and Sun Direct, all having deep pockets. Videocon is a recent entrant to this race.

The platform, given its inherent advantage technologically, has greater scope for driving revenues for operators. Latest hit movies being made available within a month of release at a fraction of multiplex ticket rates and several other value-added services or tailored packages help enhance ARPUs.

It may, therefore, be fair to believe that this would be the preferred mode towards digitising cable viewing.

Broadband difficulties

Hathway also has a broadband business that contributes about 16 per cent of overall revenues. Given the under-penetration of Internet and, more specifically, broadband in India, there may be ample scope for expansion.

Indeed, Hathway cross-sells its broadband services to its cable subscribers. But here again, operators with strong wireline networks have made significant inroads by providing DSL broadband services. BSNL, the largest broadband service provider in India, Reliance Communications, Bharti Airtel, and Tata Communications have taken a lion's share of the internet subscribers between them.

With the increase in the shipments and usage of laptops in India, most of these companies have also been able to drive growth through sale of data cards.

With a wireless last-mile being the preferred route for all technology adoptions in India, these companies may also benefit from winning WiMax licenses for providing wireless broadband access. All this would reduce the addressable pie for Hathway.

The offer

Hathway is looking raise about Rs 735 crore by sale of around 27.75 million shares at a price band of Rs 240-265. About Rs 200 crore would go to selling shareholders, Monet and MSPI Mauritius. Acquisition of customers, investment in developing the cable and broadband infrastructure are the stated objectives towards which the issue proceeds would go.

via BL